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SOVEREIGNTY, SECURITY & TRADE Trends Challenging the International Order 2016 Financial Planning Forum Richmond, VA June 9, 2016 Presented by: Christopher Coughlin The Indispensable Country “Free Trade” & The “Vacation From History” THE NEW, AMERICAN ORDER Bretton Woods Agreement (1944) • End of “Balance of Power” and “Spheres of Influence” • Nullify the catalysts of political contests based on economic interests • Integrated world market: • Rationalized exchange rates • Low tariffs • Reconstruction and Development Assistance RESULTS Measure 1950 2015 Difference Global Population 2.5 Billion 7.3 Billion +192% Global GDP $5 Trillion $74 Trillion +1380% Global Extreme Poverty 55% 10% -81% Global Literacy 52% 86% +65% 1991: “THE END OF HISTORY” AND A NEW WORLD ORDER THE RISE OF CHINA In 10 years China’s economy has experienced historically unprecedented growth: CHINA: NEW WEALTH – NEW AMBITIONS CHINA’S STRATEGIC INTEREST Continued Economic Growth and Expanding Political Power: Dependent on Securing Sea Lanes to Energy & Trade SOUTH CHINA SEA SOUTH CHINA SEA: OIL & NATURAL GAS RESERVES CONFLICTING CLAIMS ON THE SOUTH CHINA SEA WELCOME TO THE NEXT CRISIS PROVOCATIVE SOVEREIGNTY • China creating and arming habitable islands from reefs in contested region • The islands project Chinese military power into disputed territory • Philippines has filed a complaint at the Permanent Court of Arbitration at The Hague • Triggering an ‘arms race” in Asia LARGER US & GLOBAL INTEREST IN THE SOUTH CHINA SEA SOUTH CHINA SEA: ENERGY SHIPPING US TRADE ACTIVITY IN THE ASIA/PACIFIC REGION INVESTMENT SNAPSHOT: ASIAN EXCHANGE TRADED FUNDS (ETFS) CHINA IS THE LARGEST SINGLE HOLDER OF US DEBT WHY NOW? Demographic Time Bomb: • “4-2-1” • 200 million Chinese are over 60 • By 2040 30% of China’s population will be over 60 • China must secure what it needs soon before: • Necessary reallocation of state resources • Huge gaps appear in working age/military age citizens • Declining economic and military power CHINESE DESIGNS ARE AT ODDS WITH ITS IMMEDIATE ECONOMIC INTERESTS THE SOUTH CHINA SEA IS VITAL TO US AND CHINA SHORT OF AN ATTACK ON JAPAN, SOUTH KOREA, PHILIPPINES OR TAIWAN, US NOT COMMITTED TO SPECIFIC ACTION AMBIGUITY = DANGER Russia and the Modern World • Largest country in the world (6 million square miles) • 9th largest economy (by GDP $2.1 trillion) • 9th most populous nation (143 million) RUSSIAN GDP 2000-2015 Russian GDP has increased 10 fold since 2000: RUSSIA IS CRITICAL TO EUROPE Two-way global trade with Russia is nearly $800 billion annually (2014) Russia is the source for: 36% of the European Union’s natural gas (36% for Germany) 31% of the European Union’s crude oil (40% for Germany) 31% of the European Union’s coal (33% for Germany) The European Union is the destination for: 80% of Russian crude oil exports 70% of Russian natural gas exports 50% of Russian coal RUSSIAN PIPELINES FUEL EUROPE The EU and Russia together generate nearly $16 trillion in goods and services • Virtuous “Symbiotic” relationship • Russian extractive exports power/sustain EU’s growth • EU hard currency revenues fuel Russian growth However… Growing dissonance between Russian economic interests and perceived security interests THE GRIEVANCE In 2005, Russian President Vladimir Putin said the collapse of the Soviet empire “was the greatest geopolitical catastrophe of the century.” “Auto-pilot” Western expansion = unfavorable balance of power for the Russians THE “LAST STRAW(S)” 1999-2009 – 12 Eastern European nations and former Soviet republics join NATO 2001-14 – NATO fights w/US in Afghanistan 2011 - NATO bombs Libya/ “Regime Change” 2008 - Ukraine becomes a candidate membership in NATO 2014 – Ukraine prepares to sign cooperation agreement with EU over Russian objections NATO: 1990 AND TODAY FACTORS IN RUSSIAN INSECURITY • Russia doesn’t make anything – “extractive economy” – completely dependent, no industry • Least geographically secure nation on earth – no natural boundaries • “Demography is Destiny” • • • • • Male life expectancy is between 59-63 years (75 in US) By 2040 Russian population will shrink to 120M Fewer replacement workers/soldiers Declining power/vulnerable borders 8 years to act PARADOX OF OPPORTUNITY IN THE WEST • NATO enlarged but hollow • US military power re-focused in other regions • Ukraine is in a grey area • Ethnic Russian populations provide pretext PARADOX OF OPPORTUNITY IN THE WEST • EU at a Cross-Roads • Monetary Union w/o Political Union has been a failure • Debt Crisis in the south, “Brexit” in the north • Regulatory “strangulation” from Brussels/meager growth (World Bank estimates 1.6% growth 2016) • Mass immigration and terrorism/populist backlash • Complete reliance on US/NATO for military support THE RUSSIAN BLUEPRINT THE BEGINNING: CRIMEA & UKRAINE US/EU RESPONSE TO RUSSIA: ECONOMIC SKIRMISHING • Travel Bans • Asset Freezes on Individuals and organizations • Restrictions on dual-use technology (energy sector) • Sanctions on banks, energy and defense firms • Exclude entities from western capital markets Focused on institutions associated with Putin IMPACTS ON RUSSIAN ECONOMY THE GREAT GAMBLE For Russia: Economic Pain vs Territorial Security vs Time For the West: Russian Energy vs Political Unity vs Economic Uncertainty Ukraine is a grey area • On the Table: • EU’s continued viability as a union and currency • NATO’s credibility (Article V) • AMIGUITY = DANGER SUMMARY Bretton Woods created unprecedented prosperity, anchored by the US and the Soviet Union The aftermath of the Soviet collapse catalyzed a rise in sovereign nationalism that subordinates collective economic interests to individual national interests, even if they conflict In the case of Russia and China, these pressures are magnified by adverse demographic trends that cannot be reconciled in the short term Ambiguity drives renewed economic uncertainty with potential significant impacts on the global trade and investment “May you live in interesting times.” Frederic R. Coudert “Praemonitus, praemunitus.” (Forewarned is Forearmed)